.png)
.png)
Key points
- The freeport tax package omitted any enhanced R&D tax reliefs, despite freeports being intended as ‘hotbeds of innovation’ and increasing R&D expenditure often being regarded as synonymous with driving innovation.
- The tax package focuses on relief for businesses acquiring and developing commercial land, acquiring equipment and employing individuals.
- Whether these tax reliefs enable freeports to meet the government’s stated objective remains to be seen.
In his spring Budget, chancellor of the exchequer Rishi Sunak announced the location of eight freeports across England, intended to become operational by late 2021. When the creation of freeports was first announced in February 2020, one of the government’s stated objectives was that these sites would be ‘hotbeds of innovation’, benefiting from customs and tax reliefs and incentives to help energise the post-Brexit economy.
Encouraging innovation is often seen as synonymous with increasing research and development (R&D) investment. Given the government’s target to raise total R&D investment to 2.4% of UK GDP by 2027 (an increase of over 40% since 2017), it was anticipated and even assumed by those in R&D-intensive sectors that enhanced R&D tax reliefs and possibly intellectual property-focused tax incentives would be included in the freeport tax package.
Therefore, in October 2020, many commentators were surprised that R&D specific reliefs were notably absent from the final freeport tax package. It may seem that the government has missed an opportunity to encourage innovation and drive forward R&D investment. However, the overall freeport policy objectives are not focused on innovation through R&D and therefore, rather than an oversight, the omission of R&D specific tax reliefs appears to be a considered policy decision.
Before discussing the substance of the freeport tax package and the possible rationale for why R&D reliefs are absent, it is useful to outline the nature of a freeport and the government’s stated policy objectives.
What are freeports?
There is no precise definition of a freeport. Generally, a freeport will be a designated area, commonly situated in and around existing ports, including airports and rail freight hubs, that benefit from advantageous customs and tax rules and often reduced regulatory requirements. In the UK, freeports will be distinct customs zones that will operate outside the country’s customs borders, allowing goods to be imported, processed and re-exported without incurring any customs duties. Duties will be levied when goods leave the freeport to enter the wider UK market.
The government’s policy objectives behind freeports are to:
- establish national hubs for global trade and investment across the UK;
- promote regeneration and job creation; and
- create hotbeds for innovation.
The stated lead policy objective, promoting regeneration and ‘levelling-up’ the country by driving investment to deprived areas has unsurprisingly driven the design of the freeport tax package.
Freeport tax package
The freeport tax reliefs are not available to all businesses operating within a freeport; rather they are only accessible in designated freeport tax sites, which will be specific locations within the freeport. The main legislation introducing tax reliefs for freeports was included in FA 2021, s 113 to s 115. Broadly, the tax reliefs are:
- stamp duty land tax exemption for non-residential land until 30 September 2026 (FA 2021, Sch 23);
- capital allowances – an enhanced structures and buildings allowance of 10% (rather than 3%) and 100% first year plant and machinery allowances until 30 September 2026 (FA 2021, Sch 22);
- employers’ National Insurance contributions exemption (National Insurance Contributions Bill 2021-22, clause 1 to clause 5) – broadly, no employer’s contributions for new employees for three years; and
- business rates relief – up to 100% relief for five years.
Taking these reliefs collectively, they are focused over a five-year period, on encouraging the purchase of land for commercial purposes, developing the land, acquiring machinery and equipment to use in the newly developed land and hiring new employees to undertake the work. Given that one of the stated criteria of a freeport tax site is that it should be ‘underdeveloped’ ‘brownfield land’ (Freeports Bidding Prospectus, para 3.1.25), it is unsurprising that these tax reliefs should take centre stage.
Having explained the rationale for the tax reliefs included in the freeport tax package, it is now possible to surmise why R&D tax credits did not make the cut.
Possible rationale
Freeports should encourage new economic activity. Enhanced R&D tax credits may have been intentionally omitted to safeguard against harmful displacement of existing activity, which the government is keen to avoid. In the October 2020 consultation response document, the government expressed concern that including R&D reliefs in the freeport tax package may contribute to ‘displacement’. Indeed, 32% of respondents considered displacement risks relating to freeports to be high and localised freeport R&D incentives were cited as a potential cause.
The government’s continuing concerns about the vulnerability of R&D tax credits to abuse may also have influenced the ultimate policy decision to exclude them. It was steadfast that freeports must not increase the ‘incidence of abuse of tax reliefs’. Some consultation respondents highlighted R&D tax credits as posing an abuse risk, with almost all agreeing that freeports should not enable those seeking to abuse tax reliefs.
Although no specific R&D related reliefs are being introduced, the existing R&D tax credits remain available to businesses operating in a freeport tax site. The government considers these to be ‘highly competitive internationally’ and therefore, may have considered that additional R&D incentives were superfluous.
Conclusion
We can ponder the rationale for omitting R&D tax incentives from the freeport tax package, but ultimately, it appears that this was not accidental. The government took decisive and considered action to use tax reliefs specifically to encourage the development of non-residential land, acquisition of equipment and employment of individuals. Whether this decision will translate into increased innovation and whether freeports will meet their stated objectives remains to be seen. It is hoped that R&D-intensive industries, such as the life sciences sector, fare better when the outcome of the review into R&D tax credits is published later this year.
